Weekly Market Trends

Position for Prolonged Uncertainty with a Multi-Factor Approach

Inflation shows signs of slowing, but has not been tamed just yet. And with the prospects of a grim earnings season, equity market volatility may spike. As market sentiment continues to swing, consider a blended factor approach to balance downside risks and upside potential. 

5 min read
Head of SPDR Americas Research

This article was written with contributions from Federico Burroni. Federico is a Research Analyst on the SPDR Americas Research Team. 

The S&P 500® Index continued on a positive trajectory, adding 2.7% last week. This reverses the trend from the end of 2022, when the index posted negative returns for three weeks in a row. Oil gained 8.3% last week.1 It has been buoyed by China easing COVID restrictions, which has improved the expectations for a demand recovery. 

Table of major market index performance as of January 13 2023

Low Unemployment and Modest Growth in Europe

Eurozone unemployment remained at 6.5% in November, staying steady at October’s record low.2 In the UK, recession worries eased a bit as gross domestic product (GDP) grew 0.1% in November. This beat economists’ expectations of a 0.2% contraction. 

Japan Maintains Negative Interest Rates

Despite speculation for a hawkish surprise, the Bank of Japan (BoJ) kept its negative rate at -0.10%, leaving interest rates negative for more than six years. 

US Earnings Season Begins

Some of the largest US banks kicked off earnings season last week as JPMorgan Chase CEO Jamie Dimon warned of a modest deterioration in the macroeconomic outlook.

Tracking US Sentiment and Spending

The University of Michigan Consumer Sentiment Index climbed to 64.6 in January — rising more than 8% since December to a nine-month high.3 On Wednesday, the US Census Bureau reported a slowdown in December retail sales, providing a glimpse of weaker spending trends over the holiday season.

The Producer Price Index (PPI), which tracks inflation from the perspective of manufacturers and wholesalers, decelerated to 6.2% year over year in December.4 Meanwhile, on an annual basis, headline Consumer Price Index (CPI) rose 6.5% in December.5 This is the smallest year-over-year increase since October 2021.

Combining Factors for Balance

While December CPI shows a further slowdown in inflation, it is still too early for the Federal Reserve to claim victory over inflation. Core CPI remains at 5.7%, well above its pre-pandemic average of 2%.6 And with earnings for the S&P 500 Index expected to drop 4.1% for Q4 2022,7 a grim earnings season may drive equity market volatility. As market sentiment continues to swing between hope and fear, investors are likely to seek a way to balance both downside risks and upside potential. 

Implementation Idea: SPDR® MSCI USA StrategicFactorsSM ETF (QUS)

The SPDR® MSCI USA StrategicFactorsSM ETF (QUS) blends Value, Quality, and Low-volatility factors into a single strategy. Each factor has a role to play: 

  • The Value bias may be helpful given that, after falling more than 18% in 2022, US equities are still trading above their forward 12-month P/E long-term average.8
  • Exposure to Quality may be beneficial ahead of an expected year-over-year earnings decline — the first since Q3 2020 — as high-quality companies may weather a growth slowdown better than others. 
  • QUS recorded a smaller drawdown in 2022 when compared to the broader market.9 Low volatility continues to appeal to investors interested in mitigating downside risk without completely missing the upside potential.

QUS Demonstrated Stronger Performance and Higher Sharpe Ratio

Column chart showing QUS performance and Sharpe ratio versus peer groups

Since its inception, QUS ranks in the top 11% of Morningstar category peers based on annualized returns, and top 6% of peers based on Sharpe ratio.10 It has also displayed more upside capture than single-factor Low-volatility funds (93% versus 80%), while exhibiting 3.05% less max drawdown than broad equities.11

QUS Standard Performance as of December 31, 2022

table showing QUS standard performance as of December 31, 2022

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